There are hopes of improvement for Europe's commercial property market, as a long-standing trend of decline showed a slowdown for the first three months of 2024.
Although values were down, they fell by just 0.5% in the first quarter. That was an improvement on the previous quarter, which saw a drop of 3.4%, according to data from the Altus Group.
"As we start off 2024, we're seeing encouraging signs in the European commercial property market, with commercial property value declines moderating significantly across all sectors," Altus Group's senior vice president Phil Tily wrote in the group's analysis of European property market valuation trends.
"Industrial and residential properties retained nearly all of their value from the previous three months. The decline in office valuations slowed down notably, to 0.8% from 5.3%," the report said, adding that the overall drop in prices: "Was also the smallest decrease posted since property valuations began declining in Q3 2022".
Each quarter, Altus Group analyses the performance of a €29 billion pool of property managed by pan-European open-ended funds in 17 European countries. These properties include industrial, office, retail and residential property sectors.
Based on their analysis, European commercial properties have lost 16.5% of their value since June 2022. In this period, out of all the categories, offices lost the most - 21.8% of their price - while retail suffered the least, having to write down 10%. Residential properties lost 12.1% of their values in this period.
Where in Europe has the market shown the most strength?
Across Europe, the most drastic change came from France's office market, where values suffered a loss of 7.6% in Q1 2023 but gained 2.4% in the first three months of 2024.
A similar trend of reversal was spotted in the industrial properties market in Denmark, Germany and the Netherlands, as well as the Swedish office market and among residential properties in the Netherlands and Denmark.
European property prices have been hit hard by high interest rates. Investors have been looking for better returns, in the face of higher yields. These premiums are a percentage of the value of the property, consequently, their rise drags down the prices.
Some of the risk has been offset by rising rents, keeping the price drop at bay.
For instance, values in the industrial sector declined by 0.2% in the first three months of the year but saw a 1.9% increase in market rents.
As inflation is nearing central bank targets, investors now expect the ECB to begin cutting interest rates in June. The closely watched step comes with the promise of lower risks, cheaper capital and better returns therefore reducing the downward pressure on property values.
Outside of the main four property categories, values rose by 3.3%, mostly driven by properties for student housing. The report noted that was due to: "The ongoing shortage of high-quality student accommodation in European cities, coupled with strong demand for study abroad."
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